Money as Debt: Where does all the money come from?
- 07-22-2008, 06:41 AM
- 07-22-2008, 12:48 PM
Of course, 'money' is analogous to 'credit,' anything else would be essentially be some form of barter. Most people learn this in grade school, though it seems to come as a shocking surprise to Canadian socialist Paul Grignon, the man behind this cute little anti-capitalist polemic.
It's not that he's wrong -- Money is indeed created through a fractional reserve system, wherein a bank maintains only a portion of its reserves relative to the loans on it's book -- It's the (unsubstantiated in this presentation) subtext that there is something immoral about this, banking is evil, thus world socialism is the only answer, that I find ridiculous here
Not to mention Schoolhouse Rock could have taught us about the banking system in about 5 minutes instead of 45, and without all the socialist rhetoric.
Contrary to the one-sided way it is presented here, banks pay depositors an interest rate in return for their contribution to capital used to make loans, the bank's owners also take the risk that borrowers will not repay their loans, not to mention the fact that banks absorb the risk of fluctuating interest rates, fraud, etc.
When the bank becomes unwilling to loan (for instance, right now when they have a lot of bad loans on the books already), fewer borrowers will get credit to start new projects, economic activity is restrained, and the cost of borrow goes up (interest rates increase). Banks do not 'print free money,' so much as they risk their assets against a probability of return from their credit underwriting activities. Banks that are bad at this do not make money.
Without the ability to go to a bank and get a loan to do something like start a business, go to college, or build a house, economic activity would be pretty damn retarded. Grignon's real thesis here is that the national government should make this determination as to whose efforts should finance who else's activities -- Communism. Even the erstwhile Soviets ran into a problem here, that without a market to provide a real 'price' for goods, it was essentially impossible to make decent decisions on how to value different options as to what to command to be produced.
It is when the (non-country-specific) GOVERNMENT 'prints money' to finance its own overspending or to artificially stimulate the economy by pouring cash into it, when value is destroyed by the 'inflation tax.' Note that the intent of the government's printing money here is in fact, to artificially ease credit when banks are unwilling to loan due to economic conditions.
Banking credit, by contrast, is tied to the risk/reward of real economic activity. For instance, there is essentially no subprime market anymore. Low quality home buyers simply cannot get credit to buy. By contrast, alternative energy projects are having no trouble attracting capital right now.
Now the government may think it has good reasons to pour cash into the economy, such as easing credit during a recession (dot-com bust, housing bubble), but realize that this is essentially a tax on smart people who didn't max out their personal credit to buy pets.com stock or that giant overpriced McMansion in the middle of nowhere. Ultimately we'll all share to cost of that decision to stimulate via inflation (devaluation of money).
- 07-22-2008, 02:36 PM
But what about the governements acually paying off the debt, this is implying that it would destroy our economy and really it wants to just keep gaining more debt.
07-22-2008, 03:11 PM
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I agree that the guy is definitely a communist. However, the objective value of gold or silver standard money is a beautiful thing. I hate the idea that a government agency arbitrarily determines the value of our currency nowadays.
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